Advanced Search
MyIDEAS: Login to save this article or follow this journal

Precautionary Savings or Working Longer Hours?

Contents:

Author Info

  • Josep Pijoan-Mas

    (CEMFI)

Abstract

This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labor productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption. (Copyright: Elsevier)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://dx.doi.org/10.1016/j.red.2005.11.002
File Function: Full text
Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 2 (April)
Pages: 326-352

as in new window
Handle: RePEc:red:issued:v:9:y:2006:i:2:p:326-352

Contact details of provider:
Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/review.htm
More information through EDIRC

Order Information:
Email:
Web: http://www.EconomicDynamics.org/RED17.htm

Related research

Keywords: Incomplete Markets; Labor Supply; Precautionary Savings;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hopenhayn, Hugo A & Prescott, Edward C, 1992. "Stochastic Monotonicity and Stationary Distributions for Dynamic Economies," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1387-406, November.
  2. Rafael Repullo, 2001. "A model of takeovers of foreign banks," Spanish Economic Review, Springer, Springer, vol. 3(1), pages 1-21.
  3. Fiorentini, G. & Sentana, E. & Calzolari, G., 2000. "The Score of Condionally Heteroskedastic Dynamic Regression Models with Student T Innovations, and an LM Test for Multivariate Normality," Papers, Centro de Estudios Monetarios Y Financieros- 0007, Centro de Estudios Monetarios Y Financieros-.
  4. Albert Marcet & Francesc Obiols-Homs & Philippe Weil, 2003. "Incomplete Markets, Labor Supply and Capital Accumulation," Sciences Po publications, Sciences Po 659, Sciences Po.
  5. Gerard Llobet & Hugo Hopenhayn & Matthew Mitchell, 2003. "Rewarding Sequential Innovators: Prizes, Patents and Buyouts," Levine's Working Paper Archive 618897000000000682, David K. Levine.
  6. Josep Pijoan-Mas, 2007. "Pricing Risk in Economies with Heterogeneous Agents and Incomplete Markets," Journal of the European Economic Association, MIT Press, MIT Press, vol. 5(5), pages 987-1015, 09.
  7. Hernandez-Murillo, Ruben & Llobet, Gerard, 2006. "Patent licensing revisited: Heterogeneous firms and product differentiation," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(1), pages 149-175, January.
  8. Gilles Saint Paul & Samuel Bentolila, 2000. "Will EMU increase eurosclerosis?," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 449, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Gutierrez-Urtiaga, M., 2000. "Managers and Directors: a Model of Strategic Information Transmission," Papers, Centro de Estudios Monetarios Y Financieros- 0003, Centro de Estudios Monetarios Y Financieros-.
  10. Guillermo Caruana & Liran Einav, 2008. "A Theory of Endogenous Commitment," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 99-116.
  11. Lilia Maliar & Serguei Maliar, 2003. "The Representative Consumer in the Neoclassical Growth Model with Idiosyncratic Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 368-380, April.
  12. Joseph Altonji, 1984. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 562, Princeton University, Department of Economics, Industrial Relations Section..
  13. Gutierrez, M., 2000. "A Contractual Approach to the Regulation Corporate Directors' Fiduciary Duties," Papers, Centro de Estudios Monetarios Y Financieros- 0013, Centro de Estudios Monetarios Y Financieros-.
  14. Sentana, Enrique, 2001. "Mean Variance Portfolio Allocation with a Value at Risk Constraint," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2997, C.E.P.R. Discussion Papers.
  15. Calzolari, G. & Fiorentini, G. & Sentana, E., 2000. "Constrained EMM and Indirect Inference Estimation," Papers, Centro de Estudios Monetarios Y Financieros- 0005, Centro de Estudios Monetarios Y Financieros-.
  16. Simon Parker & Tim Barmby & Yacine Belghitar, 2004. "Wage Uncertainty And The Labour Supply Of Self-Employed Workers," Royal Economic Society Annual Conference 2004, Royal Economic Society 67, Royal Economic Society.
  17. Manuel Arellano, 2003. "Discrete choices with panel data," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 27(3), pages 423-458, September.
  18. Claudio Michelacci & Javier Suarez, 2000. "Business Creation and the Stock Market," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0673, Econometric Society.
  19. Samuel Bentolila & Juan F. Jimeno, 2003. "Spanish Unemployment: The End of the Wild Ride?," CESifo Working Paper Series 940, CESifo Group Munich.
  20. Bentolila, Samuel & Ichino, Andrea, 2000. "Unemployment and Consumption: Are Job Losses Less Painful near the Mediterranean?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2539, C.E.P.R. Discussion Papers.
  21. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  22. Almazan, Andres & Suarez, Javier, 2000. "Managerial Compensation and the Market Reaction to Bank Loans," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2643, C.E.P.R. Discussion Papers.
  23. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  24. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2010. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 118(4), pages 681-722, 08.
  25. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
  26. Jonathan Heathcote & Kjetil Storesletten, 2005. "Insurance and Opportunities: The Welfare Implications of Rising Wage Dispersion," 2005 Meeting Papers, Society for Economic Dynamics 107, Society for Economic Dynamics.
  27. Ayuso, J. & Repullo, R., 2001. "Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Cental Bank," Papers, Centro de Estudios Monetarios Y Financieros- 0104, Centro de Estudios Monetarios Y Financieros-.
  28. DAVILA, Julio & HONG, Jay H. & KRUSELL, Per & RIOS-RULL, José-Victor, . "Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2463, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  29. Fiorentini, Gabriele & Sentana, Enrique & Calzolari, Giorgio, 2004. "On the validity of the Jarque-Bera normality test in conditionally heteroskedastic dynamic regression models," Economics Letters, Elsevier, Elsevier, vol. 83(3), pages 307-312, June.
  30. Josep Pijoan-Mas, 2004. "Precautionary Savings or Working Longer Hours?," 2004 Meeting Papers, Society for Economic Dynamics 350, Society for Economic Dynamics.
  31. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, Elsevier, vol. 20(2), pages 177-181.
  32. Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Banco de Espa�a Working Papers, Banco de Espa�a 0016, Banco de Espa�a.
  33. Guillermo Caruana & Marco Celentani, 2001. "Career Concerns And Contingent Compensation," Economics Working Papers we014811, Universidad Carlos III, Departamento de Economía.
  34. Floden, Martin, 2005. "Labor Supply and Saving under Uncertainty," Working Paper Series in Economics and Finance, Stockholm School of Economics 597, Stockholm School of Economics.
  35. Felix Kubler & Karl Schmedders, 2000. "Incomplete Markets, Transitory Shocks And Welfare," Computing in Economics and Finance 2000, Society for Computational Economics 130, Society for Computational Economics.
  36. Josep Pijoan-Mas 2 & Antonia Díaz & José-Víctor Ríos-Rull, 2001. "Habit Formation: Inplications For The Wealth Distribution," Economics Working Papers we015114, Universidad Carlos III, Departamento de Economía.
  37. Sentana, Enrique, 2004. "Factor representing portfolios in large asset markets," Journal of Econometrics, Elsevier, Elsevier, vol. 119(2), pages 257-289, April.
  38. Flodén, Martin & Linde, Jesper, 1998. "Idiosyncratic Risk in the U.S. and Sweden: Is there a Role for Government Insurance?," Seminar Papers, Stockholm University, Institute for International Economic Studies 654, Stockholm University, Institute for International Economic Studies.
  39. Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Banco de Espa�a Working Papers, Banco de Espa�a 0016, Banco de Espa�a.
  40. David Card, 1990. "Intertemporal Labor Supply: An Assessment," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 649, Princeton University, Department of Economics, Industrial Relations Section..
  41. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(4), pages 496-521, October.
  42. Llobet, Gerard, 2003. "Patent litigation when innovation is cumulative," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(8), pages 1135-1157, October.
  43. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(4), pages 818-857, August.
  44. Albarran, P., 2000. "Income Uncertainty and Precautionary Saving: Evidence from Household Rotating Panel Data," Papers, Centro de Estudios Monetarios Y Financieros- 0008, Centro de Estudios Monetarios Y Financieros-.
  45. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
  46. Pedro Mira & Jes�s M. Carro, 2006. "A dynamic model of contraceptive choice of Spanish couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(7), pages 955-980.
  47. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," Working Paper Series in Economics and Finance, Stockholm School of Economics 480, Stockholm School of Economics.
  48. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3658, C.E.P.R. Discussion Papers.
  49. Claudio Michelacci, 2003. "Low Returns in R&D Due to the Lack of Entrepreneurial Skills," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(484), pages 207-225, January.
  50. Manuel Arellano, 2003. "Modelling Optimal Instrumental Variables For Dynamic Panel Data Models," Working Papers, CEMFI wp2003_0310, CEMFI.
  51. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics, Elsevier, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296 Elsevier.
  52. Fernandes, A., 2000. "Altruism with Endogenous Labor Supply," Papers, Centro de Estudios Monetarios Y Financieros- 0002, Centro de Estudios Monetarios Y Financieros-.
  53. Antonio, J. & Martin, G., 2001. "Spot Market Competition with Stranded Costs in the Spanish Electricity Industry," Papers, Centro de Estudios Monetarios Y Financieros- 0106, Centro de Estudios Monetarios Y Financieros-.
  54. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  55. Gutierrez, M., 2000. "An Economic Analysis of Corporate Directors' Fiduciary Duties," Papers, Centro de Estudios Monetarios Y Financieros- 0014, Centro de Estudios Monetarios Y Financieros-.
  56. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 17(5-6), pages 953-969.
  57. Hamish Low, 2005. "Self-Insurance in a Life-Cycle Model of Labor Supply and Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 945-975, October.
  58. Gabriele Fiorentini & Enrique Sentana & Giorgio Calzolari, 2000. "The Score Of Conditionally Heteroskedastic Dynamic Regression Models With Student T Innovations, An Lm Test For Multivariate Normality," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2000-33, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  59. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 373-396, October.
  60. repec:hal:journl:halshs-00196183 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Una Visita a Madrid I: Los Taxis
    by Jesús Fernández-Villaverde in Nada Es Gratis on 2009-09-21 11:30:30
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:issued:v:9:y:2006:i:2:p:326-352. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.